Investors with medium risk appetite but passive management style should allocate funds both in debt and equity section. Debt part will provide the stability and equity part will work as a kicker for better returns. Ultimately stock market has to go up.

It’s matter of time and if you are patient, there is no point in keeping away from equity investment. Considering stability and capital appreciation in mind I have devised strategy for investors with moderate risk tolerance. You can use it as reference while creating your portfolio.

 

Assumptions about the Investor

 

Type

Balanced or Passive investors with medium risk appetite

Investment Capital

2 Lakh (You can put a value as per availability of funds)

Components of investment

Equity – 50%, Bonds – 50% Equity

Expected return

12% yearly

Risk Tolerance

Medium

Time Horizon

At least 3 years

 

Ideal Investment Option and Allocation

50% Investment should be done in 3 stocks from Nifty and remaining 50% will be invested in two debt funds. Selection criteria for stocks and debt funds are described below.

 

Selection process for Equity and Bond

Stock Selection

  • Find PEG ratio of all fifty companies in Nifty
  • Choose 3 with the lowest PEG ratio
  • Find out the following –
    1. Does the company have any criminal/fraud case pending against it? (non-negotiable test)
    2. Is the operating cash flow positive?
    3. What is the EBITDA, EBT, and EAT in terms of margin? (EAT margin > 12% is acceptable)
    4. CAGR for revenue and profit growth (CAGR > 15%)
    5. Dividend history (Consistency is important). If the company has never paid dividend that is fine.
    6. Any other study which may be useful
  • If all three companies meet these criteria. Make a portfolio of these 3 companies and invest equal amount in all of them.
  • If a company doesn’t meet the criteria, take the next higher PEG Company from Nifty.
  • Repeat the process till you get 3 lowest PEG companies that also meet the criteria mentioned.
  • Once you find 3 companies, divide the investible amount in three equal parts and invest in these firms.
  • Revisit the Nifty companies every 6 months and change if the three stocks selected are no more the lowest PEG stocks.

Bond

The remaining 50% of investment will go towards a debt fund. Read the article “Investment Strategies for Conservative Investors for the selection criteria.

 

Important point

This strategy will work only for long term investment horizon. Investors should be invested for at least 3 years to reap the benefit. Remember, patience is the most important virtue which pays in stock market. So be patient and enjoy the returns.

 

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